Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Tax consequences for an individual shareholder relating to the declaration of a taxable dividend by a taxable Canadian corporation and the recording of such dividend through journal entries.
Position: Previous positions.
Reasons: Dividends are taxed at the individual shareholder level when they are received. In itself, a journal entry would not represent an amount paid and received for the declaration of the dividend. Accounting documents or entries serve only to reflect transactions. It is the reality of the facts that determines the true nature and substance of transactions.
XXXXXXXXXX
2013-051576
M. Séguin
January 30, 2014
Dear Sir,
Subject: Tax treatment of dividends
This is in response to your letter of December 19, 2013 in which you requested our views respecting the tax treatment of dividends declared by a corporation in certain hypothetical situations that you briefly described.
Unless otherwise indicated, any reference to a section of the Act or any of its provisions in this document is a reference to a section or provision of the Income Tax Act (the "Act").
This technical interpretation provides general comments on the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings and Technical Interpretations.
1) Hypothetical situations presented
A taxable Canadian corporation ("Corporation") had a fiscal year ending on June 30 of each year. A dividend of $30,000 was declared based on the financial statements of Corporation for its year ending June 30, 2012. A sole shareholder held all the shares of the capital stock of Corporation. We have assumed that the sole shareholder of the Corporation was an individual (other than a trust that is a registered charity) and that the dividend discussed below was a "taxable dividend" within the meaning of paragraph 89(1). We also assumed that the dividend discussed below in each situation was not an "eligible dividend" within the meaning of subsection 89(1) and that there was not a "securities lending arrangement" as defined in subsection 260(1) or a "dividend rental arrangement" as defined in subsection 248(1). Finally, we have assumed for your questions d) and e) below that the shareholder loan made to Corporation and the Corporation made loan to the shareholder were legally effective loans.
You asked questions about the following five situations:
(a) The dividend of $30,000 was fully paid in cash during the period from January 1 to December 31, 2012.
(b) The dividend of $30,000 was fully paid in cash during the period from July 1 to December 31, 2011.
(c) The dividend of $30,000 was paid as follows:
• $10,000 was paid in cash during the period from July 1 to December 31, 2011;
• $20,000 was paid in cash during the period from January 1 to December 31, 2012.
d) The dividend was not paid in cash. It was recorded in the books as an increase to a loan owing to the shareholder by the Corporation.
e) The dividend was not paid in cash. It was recorded in the books as a decrease to a loan owed by the shareholder to the Corporation.
2) Your question
For each situation, you asked what the tax treatment would be to the shareholder of the Corporation of receiving the dividend.
3) Our comments
As a general rule, the recipient of taxable dividends received from a corporation resident in Canada must include an amount in computing its income for a taxation year by virtue of paragraph 12(1)(j) and subsection 82(1). Furthermore, a dividend may be declared and not be paid immediately. The shareholder cannot therefore be considered to have received the dividend until it is paid. The question of whether an amount constitutes an "amount received" is a question of fact that must be resolved by taking into account all the circumstances and particulars of each situation.
In situation (a) above, the taxable dividend of $30,000 declared by the Corporation that was fully paid in cash should be included in computing the income of its shareholder, for its taxation year ending on December 31, 2012, by virtue of paragraph 82(1)(a) since it is in fact received by the shareholder during the 2012 calendar year. In addition, the shareholder should include 25%, or $7,500, in the computation of the shareholder’s income for his or her 2012 taxation year by virtue of paragraph 82(1)(b) as the "dividend gross-up". The shareholder could ultimately claim a tax credit equal to 2/3 of the increase calculated above, or $5,000.
In situation (b) above, the tax consequences for the shareholder would be the same except that the taxation would occur in the taxation year ending on December 31, 2011 instead of in the 2012 taxation year, since the dividend would be fully paid in cash in 2011 and thus would have in fact been received by the shareholder in 2011.
In situation (c) above, of the $30,000 taxable dividend declared by Corporation, the $10,000 paid in cash in the period from July 1 to December 31, 2011 should be included in the computation of the shareholder's income, for its 2011 taxation year, by virtue of paragraph 82(1)(a) since the amount of $10,000 in fact was received by the shareholder in 2011. In addition, 25%, i.e., $2,500, in computing income for the shareholder’s 2011 taxation year by virtue of paragraph 82(1)(b), as a "dividend gross-up". The shareholder ultimately could claim a tax credit equal to 2/3 of the increase calculated above, or $1,667. With respect to the $20,000 paid in cash during the period from January 1, 2012 to December 31, 2012, it should be included in computing income for the shareholder’s 2012 taxation year, under paragraph 82(1)(a) since the amount of $20,000 would in fact have been received by the shareholder in 2012. Furthermore, 25%, i.e., $5,000, should be included in computing income for the shareholder’s 2012 taxation year under paragraph 82(1)(b), as a "dividend gross-up". The shareholder could ultimately claim a tax credit equal to 2/3 of the increase calculated above, or $3,333.
As for situations d) and e), which concern book entries, we refer you to Technical Interpretation 9823175 where our Directorate made the following comments:
We agree that a journal entry recording a credit in a shareholder loan account does not, in and by itself, constitute the payment of the salary or dividend nor make the transaction legally effective. However, other evidence, such as the appropriate documentation in the minutes of a directors' meeting and the T-4 or T-5 reporting of the relevant amount would demonstrate that a payment has occurred. Where a credit to a shareholder's loan account or a reduction of a shareholder debt constitutes the payment of a bonus or the payment of a dividend, the amount considered to have been received by the shareholder as a bonus or dividend is equal to the amount so credited or by which the debt is so reduced, whichever is the case.
The Supreme Court of Canada in Hickman Motors Ltd. v. The Queen, 97 DTC 5363, also emphasized the ancillary role of accounting entries, as follows:
87. ... The law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions: Vander Nurseries Inc. v. The Queen, 95 D.T.C. 91 (T.C.C.); Mountwest Steel Ltd. v. The Queen (1994), 2 G.T.C. 1087 (T.C.C.); Uphill Holdings Ltd. v. M.N.R., 93 D.T.C. 148 (T.C.C.); M.N.R. v. Wardean Drilling Ltd., 69 D.T.C. 5194 (Ex. Ct.); M.N.R. v. Société Coopérative Agricole de la Vallée d’Yamaska, 57 D.T.C. 1078 (Ex. Ct.). …
The following quote from Ed Sinclair Construction & Supplies Ltd. et al. v. MNR, 92 DTC 1163 (TCC), also demonstrates the uncertainty that can occur with journal entries. The judge had to decide whether the mere fact that an amount was entered in a loan account by an accounting entry was in itself proof that it had been received. In doing so, he relied on Lord Brampton's comments in Gresham Life Society Co. Ltd. v. Bishop, (1902) 4 TC 464, as follows:
A mere bookkeeping entry in a loan account by itself does not constitute a taxable event unless there is something more, such as receipt. In Gresham Life Society Co. Ltd. v. Bishop, 1902 4 TC 464 at 476, Lord Brampton said:
My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.
Consequently, the necessary documentation must be provided in a particular instance to corroborate that factually and legally a dividend has been paid by the corporation and received by the shareholder. In this regard, book entries are ancillary and serve only to report transactions. To the extent that it is established that a dividend has actually been paid by the corporation and received by the shareholder, that dividend would be taxed on a received basis at the level of the shareholder who is an individual according to the general principles discussed above.
In closing, we refer you to the Technical Interpretation 2007-0229311I7 where the facts of the situation presented did not allow for the conclusion that by virtue of accounting entries, a capital dividend had actually been received by a corporation.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch
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